How Banks Reallocate Country Exposures

 

BIS Global Credit Risk Transfers

Credit risk transfers play a key role in shaping how international banks manage exposure across countries. By shifting risks from one counterparty country to another, global financial institutions can realign their balance sheets, reduce concentration in riskier jurisdictions, and respond dynamically to global credit conditions. These patterns not only reflect how banks perceive country-level credit risks but also mirror the evolving business models and international reach of both banks and corporations.

Understanding Credit Risk Transfers

At their core, credit risk transfers (CRTs) move exposure from one counterparty country to another. This reallocation often takes the form of parent and third-party guarantees, credit derivatives such as credit default swaps (CDS), or collateralized transactions. When the borrower defaults, these conditional claims become active, transferring the loss to the guarantor or protection seller.

In the BIS Consolidated Banking Statistics (CBS), exposures are recorded on both an immediate counterparty (IC) and an ultimate risk (UR) basis. The difference between the two—known as net risk transfers (NRTs)—represents the extent to which a banking system shifts credit exposures outward or inward relative to other countries.

• Outward risk transfers reduce exposure to a specific counterparty country.

• Inward risk transfers increase exposure to another.

• The overall global sum of risk transfers equals zero—risk is redistributed, not eliminated.

Mechanisms of Risk Transfer

Three main instruments facilitate international risk transfers:

1. Guarantees (from parent companies or third parties)

2. Credit derivatives, such as CDS

3. Collateral transfers (e.g., in repo or secured borrowing transactions)

In practice, large portions of these transfers occur between internationally active banks and non-bank financial institutions. For example:

• In a collateralized borrowing between banks, exposure may shift from the borrower’s country to that of the collateral issuer (e.g., U.S. Treasuries transferring exposure to the U.S.).

• When a bank purchases a CDS, risk moves from the reference country (where the borrower is based) to the country of the protection seller.

• Home-country risk transfers occur when credit exposures are guaranteed domestically—often via export credit or investment guarantees from a national government.

Global Patterns in Risk Reallocation

The global network of risk transfers reveals how banks manage their country exposures based on the riskiness and creditworthiness of different markets.

• Financial centres such as the United Kingdom, Luxembourg, the Netherlands, Switzerland, and the Cayman Islands show large negative NRTs, meaning banks are transferring credit risk out of these jurisdictions. Much of this activity reflects guarantees by parent banks or corporations headquartered elsewhere.

• Conversely, large advanced and emerging economies—including China, Germany, Japan, Korea, and the United States—record positive NRTs, as risk is reabsorbed into their home financial systems through guarantees and collateral.

For instance, by mid-2017, global banks had transferred nearly $200 billion of credit risk out of the Cayman Islands, equivalent to 16% of all foreign claims on an immediate counterparty basis. Across European financial centres, the figure was roughly $220 billion.

Emerging Markets and Structural Shifts

The past decade has seen notable shifts in credit risk transfers toward emerging market economies (EMEs)—particularly in Asia.

• In 2007, around 5.7% of banks’ net exposures were transferred out of emerging Asia.

• By mid-2017, this had reversed to a net inflow of 6.5% of foreign claims.

This transition reflects both the growing international footprint of Asian corporates and banks and the increased confidence of global lenders in the region’s credit strength. Banks from Chinese Taipei, Hong Kong SAR, Japan, and Singapore have expanded exposures as European institutions have reduced theirs.

Meanwhile, other regions—such as Latin America, the Middle East, and Africa—continue to experience net outward transfers, as global banks reduce exposure amid higher sovereign risk and economic volatility.

Credit Ratings and Risk Transfer Trends

Changes in sovereign credit ratings closely align with shifts in net risk transfers. From 2006 to 2016, countries with improving ratings—such as China and Korea—saw rising NRTs, meaning global banks were more willing to retain exposure. In contrast, countries facing rating downgrades, such as Brazil during its economic downturn, experienced higher outward transfers, reflecting increased risk aversion.

Overall, as emerging markets strengthen economically, international banks appear more comfortable holding direct exposures rather than hedging or guaranteeing them away.

Key Takeaways

• Risk transfers redistribute credit exposures globally—they do not eliminate risk but shift it between countries.

• Financial centres remain net exporters of risk, while large home countries of global banks are net importers.

• Emerging Asia has become a growing destination for retained credit exposure, indicating higher confidence in its financial systems.

• Sovereign ratings, collateral practices, and corporate guarantees all shape how these transfers evolve.

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Source: Bank for International Settlements – BIS Quarterly Review (December 2017)